Revisiting The "Nuclear Option": Will The Fed Buy European Bonds?

Nearly two years ago, we first breached the topic of the Fed's nuclear option: the possibility (or is that likelihood) of the Fed stepping out of the continental US and proceeding to monetize European bonds. Back then we noted: "One thing learned over the past year is that everything is a distraction for something else, and that something else, quite usually without failure, ends up being the Marriner Eccles building on Constitution Avenue in D.C. What we refer to is disclosure from a paper written by none other than the Maestro Jr, in 2004, titled "Conducting Monetary Policy at Very Low Short-Term Interest Rates" (oddly appropriate). In this paper, Bernanke discusses not only the possibility of purchasing corporate assets (bonds and stocks), but emphasizes that one other security class which the Fed may be inclined to acquire under conditions such as those today, and has an explicit authority to do so, are foreign government bonds." The specific text referenced was the following: "In simple terms, if the liquidity or risk characteristics of securities differ, so that investors do not treat all securities as perfect substitutes, then changes in relative demands by a large purchaser have the potential to alter relative security prices. The same logic might lead the central bank to consider purchasing assets other than government securities, such as corporate bonds or stocks or foreign government bonds. (The Federal Reserve is currently authorized to purchase some foreign government bonds...)" So the question then becomes: with the ECB stubbornly refusing (for now) to proceed with outright monetization, and with its balance sheet already surpassing all time records as noted earlier (see below), coupled with tomorrow's LTRO which as discussed over the weekend will be a "Risk On" attempted failure, even if providing a brief relief rally in the interim, not to mention the complete lack of any long-term viability plan out of the Eurozone (EFSF failure due to lack of demand; IMF bailout plan failure due to the UK's veto and the circular joint and several funding by Italy and Spain of an Italian and Spanish bailout), will it be, once again, the Fed which at the end of the day will have to, by covert pathways or otherwise, be forced to step in and monetize European bonds: the so called Nuclear Option? Providing the latest thoughts on the topic is SocGen's Aneta Markowska...

Nuclear options - Can the Fed buy European bonds? This was a question that came up in Friday’s testimony by NY Fed’s Dudley to a congressional panel. Dudley confirmed that the Fed has the legal authority to buy foreign sovereign debt if the collateral is considered good and with appropriate haircuts. Though he wouldn’t rule anything out, Dudley noted that this has never been done and the bar is extraordinarily high. Theoretically speaking, this could actually be seen as a good option that solves a number of economic challenges: the US would see a weaker dollar, helping to rebalance its economy, while Europe would see its funding costs go down. Yet, we believe that the Fed would be facing tremendous political resistance in the US to such a decision. To date, the Fed’s crisis fighting operations have not led to any losses; buying foreign assets would expose US taxpayers not just to credit risk but also to currency risk. The Fed would probably think long and hard before taking such a step, particularly during a politically charged election year.

Yes, the Fed will think long and hard, but since as Kyle Bass observed, an ECB response would likely come only after a Eurozone default, and thus would be too late, an outcome which Draghi has telegraphed well in advance, we doubt that political considerations will hold the Fed back from doing whatever it needs to rescue the banking system, which currently has as its focal point day to day developments in Europe. It is also our contention that preserving the "Fiat way of life" is a sufficiently high bar for Mr Dudley. And yes, it is logical why such a move by the Fed is precisely what the Fed would desire, as it would lead to the same collapse in the USD that resulted back on March 18, 2009 when the Fed announced the expanded QE1. Finally, the primary reason why the ECB will likely not get involved is that its balance sheet is already at burgeoning records, and is well bigger than that of the Fed, making the final decision all too easy.

We, they, funny. We are all Ponzi scammers now, baby. It is all in the land of the absurd. Everyone is broke. They are printing and looking for a fiction that everyone will believe and let things go on as they have.

if I shut it down, then all elites would have to do is to kill me and resurrect the Fed...for the 4th time in US.

I would introduce legal competitions to the Fed with multiple national currencies. I mean their power really comes from monopoly of monetary policy giving you no choice but to accept their failures and corruption.

Also divide up central federal power systems and divde them into smaller portions such as at the state and county level so that government maintains representation ratio to the people. This is to prevent consolidation of power into fewer and fewer hands as populations grow. All this consolidation only benefit those at the very top as you can see from mergers and acquisitions as the top elites just grow the pyramid beneath them.

It is time to decentralize United STATES of America. We still don't have a good grasp of central governance. Time to go back to letting states develop their own ways and see what works. All we know is New York City banksters cannot be trusted.

I have been suggesting this for many months now. I truly believe that this is the ONLY viable policy in the long term. Many US financial institutions have large exposures to European sovereign debt, and a default could seriously harm their balance sheets. The financial sector is a large part of our economy here in the US, so it is in our national interest that our Federal Reserve does everything possible to stabilize Europe. And if that means full-scale debt monetization, then so be it.

Yeah... speaking of BANZAI... I'm waiting for WB7 to come out with the foto of Bernanke, while saying he wouldn't monetize the US debt, with a thought bubble above his head thinking... "Ha!ha! I haven't said anything about Eurozone debt"...

Hey MDB, what do you think would happen if 'Many US financial institutions' were forced to follow centuries old practice in finance and their balance sheets collapsed and they were forced to file bankruptcy due to stupid risks taken on the supposition that the fed would bail them out? I gotta hear your 'end of the world' scenario..... Call an early morning committee meting; the ESF is good for the overtime.

I agree with you. Provided the Governments of the Euro, wind back their socialist spending programs and restructure their Fiscal systems to ensure co-operation and restraint. If they don't the Moral Hazard will break the Fed in the future.

The economy was starting to recover, although at low interest rates. Recall the European fiasco broke the market recovery. Retirees view their wealth based on their 401K health. Poor health means less spending and a wind back in business investment.

Solving the Euro problems is the first step in the crisis. Adopting Fiscal restraint and bureaucratic efficiency is the next. Adopting modern energy solutions and infrastructure rebuilding is the final step (New Deal 2.0)

'That would be aiding and abetting the enemy. This is just more psy-ops to loosen Europe's sphincter for the Eurobond suppository.'

Who exactly is the enemy now? You realize the Eurobond simply cannot happen within the next couple of years at least? Here is a question: What can be done more covertly, the Fed buying Euro-feces or Europe getting a common Treasury Dprt?

With all the shit the Fed has gotten away with in the last, oh let's say thirty years, I'm not sure the answer is clear.

So the Fed loans more money to groups that owe them more than they can afford to repay...hmmmm...why not just loan all the people on main street the money. When the little people have their debt reduced and balance sheets strengthened don't you think they will satrt spending agian and perhaps stimulate economic growth? Oh, that's right, but if the Fed does that then Jamie Dimon and his big bank (who won't lend to Main Streeters), along with the other TBTF banks, won't be relevent or neccessary anymore...and god forbid, he couldn't make his $30 million a year fucking people. (I don't have any problem with someone making bazillions honestly...I just hate crooks). Time to resetthe system. Anyone want to get their guns and protest in front of the Fed with me? I hear the black helicopters again!

I disagree! If the EURO fails, the entire idea of a one world currency fails--dramatically. Europe will collapse momentarily as will the USA and China. Two to three years. Europe is THE linch pin of the Elites plan in my opinion. 27 Countries to manage into a world currency. I think that may well be the push in the middle east--try and herd those cats and make them into sheep-- a commonality of some sorts. That will also fail.

Then there is 1913. If I am not mistaken their 100 year lease(?) runs out on the FED in 2012. Renewal of that may be the start of a civil war right here in River City. The Boyz may well be rushing this thing due to time constraints. Maybe they'll just settle what they have looted, but I doubt it.

Man, there are enough theories to float a Barnum and Baily Circus with a full Carney runway. Milestones

Could this be the reason for the two-way FX swap lines? If the Fed just prints money and buys European sovereign bonds, then the Fed is at risk to sovereign default. However, if the Fed prints and gets foreign currency via FX swap lines from ECB and then buys European sovereign bonds, then the Fed has a little more leverage upon a soverign default. Namely, it reneges on the ECB swap line (which is a creature backed by European sovereigns) and creates a setoff to use against its claim under the defaulted soverign bonds.

Potus rules over BB in a normal government, if Potus is not afraid of being assassinated, he can fire BB any day of the week. And shut down the ponzi. We are there, we need a man at the top who is not afraid to die, and who wins over key elements in the defense, state and finance sectors of Admin to his side. I mean high level admin people and relays in private enterprise. Not every key man in the Pentagon, in State, in FED, in Treasury is part and parcel of ponzi. These circles of crime, 'cos this is what it is, have to be selective by definition. The ponzi is run by a bunch of key people all networked together through common interest and back up in corporate world. So you need top people on the people's side who are ready to die for it and PROSECUTE BIG TIME To correct it. If you have a resolute HEAD man the army immediately forms. The ground swell is there!

That's my point. And the people should vote for these men. THe more the pain, the more the determination. Champagne cork principle!

see this is where things get funny. the bernank spoke the other day and said the fed didn't have the authority to bail out european banks. but you see he does. I mentioned that it was in fact a lie, and it just had to do wi8th the way he classified bail out. yep he has the authority and ability to bail out european debt. maybe we will do a qe on the euro bonds as well.

Fed is like a black hole. They buy crap securities from banks (with freshly printed cash), and now crap Euro debt too, and all that crap paper more or less vanishes from the market. Fed can hold that stuff forever, and say it's worth whatever they want it to be worth.

"Free market capitalism is not free, not based on market principles and debases capital. Why are we trying to save a wet dream that has no relevence to the consequences of a global economy ? Because the Western world is in denial and has therefore become corrupt before the final act of systemmic collapse". Ben Benanke in his final address to Congress proir to his retirement in Dec, 2012

Folk's it's come down to this. Who is going to barrow from whom and at what price? Dudley is a complete idiot if he believes that Europe has any unpledged collateral of any kind, 'Appropriate haircuts' constitutes, oh I'd say, somewhere around 100%. Fine, the Fed will eventually bail out Europe, and never be repaid. My question is, what then? How does the Fed unwind it's balance sheet in 5 or 10 years? I'm sure they must have a plan, right?

That depends, and I don't know the answer. When the SHTF, will the central banks be considered 'senior creditor', and own everything pretty much by default? Then I suppose they will conspire to sell off the planet to the highest bidder? OK, but that just makes me need to ask another question. If the central banks own everything, are they taking 'money' in exchange for the assets they own. At that point, who determines what 'money' is? This is not making a lot of sense real quick. Maybe someone can help me out here?

The financial system is insolvent. All the banks are bankrupt. All the governments are bankrupt. The TBTFs? Bankrupt. All that you see in the news is theater to hide this truth. This summit, that meeting, this funding entity, that plan. They are working their asses off to keep reality as the folk take it for granted, up and running. So far, so good. They are trying to keep too many things from looking like they have failed at the same time, otherwise there will be a loss of confidence.

The Feds balance sheet is another one of these absurdities.

I was cracking a joke with you about them owning everything. I am sure if all of us bought into that idea, they would too. We won't. To say more on this is unlady like.

So after the ECB and Fed buy all of their own assets (I know, it is very inbred of them) then the reset happens and the IMF/World Bank say, "Here, we'll help you....but we want your gold as collateral." Since the sheep of the world have been taught gold is a barbaric relic, then the hope, the hope is that the People of the world will say, "As you wish IMF/World Bank" and life will go on, with the IMF/World Bank running monetary policy for everyone.

Good point. When fiat currencies eventually fail, the value of everything gets repriced in precious metals. Only the senior creditor gets to convert.

Today's gold price must consider the net value of post-fiat collapse divided by resources that will replace fiat currency. Basically, the net value of post-fiat earth, priced in PMs and any resource or other residual stores of value.

If the pool of future buyers becomes too small, even earth priced in PMs could be surprisingly cheap.

TPTB probably don't understand how much of their wealth comes from the average worker putting in 40 hrs and then quickly putting that store of value back into the economy. Ownership is only a benefit when a pool of buyers is willing to bid their price.

It's game over anyhow for many banks. They're trying to soften the blow, mitigate the fall-out and so on but the inevitable outcome is already very clear. You cannot fool all of the people all the time.

Short of Fed announcing Marshall Plan like rescue package of Europe with the most stringent conditions over 10 years, I can't see them doing anything else.

It's all bearish and whatever the efforts, the results are a major correction and CONTRACTION of the global economy.

The Fed isn't supposed to purchase foreign bonds. Then again, they weren't supposed to buy credit sensitve bonds like Maiden Lane (but they did). In a crisis, The Fed can do anything it wants, I guess.

Clash of the Titans: Fed Versus ECB Balance Sheets. ECB Offers As Much Money As Banks Want for 1,124 Days!

This NOW is not about the banks...the banks could survive a default...this is all about the shadow banking system..and no one can survive that...there are so many bets and betters than no one can cover a loss...and they are still betting today....when you are in trouble..double down..Bernanke will use grey words.....he will be very careful what he says...remember he just said they had no "plans" to bail out the EU...but that does not mean they can not...he is smart and very sneeky...watch what he says..and listen to what he says...there will always be an opening for anything...

Sure Bernanke will buy. Bernanke is helecopter Ben, he will buy everything.

Bernanke and the Federal Reserve has become like a financial black hole. Greece, France, Italy, Spain, Portugual, Japan and Ireland make sure you funnel all you garbage non-performing debt to Ben Bernanke and the US federal Reserve.

This is the time other countries need to funnel all non-performing debts to Ben Bernanke and the US Federal Reserve to preserve their lifestyles. Do it while you can.

Load up Ben Bernanke and the Ferderal Reserve with trillions because their sucking it all up.

According to the analysis of Jim Rickards in his book Currency Wars, this FED "strategy" fits in with the notion that the US has a vested interest in the continued to proping up of Euro relative to the USD.

Now its out that the ECB is not printing and buying the debts of the European countries in trouble. The second best solution is that the Fed is now doing it. Its a great thing, the Fed is printing Dollars buying European debt and selling it then for Euros in the secondary market for a cheaper price back to the original issuing country. The perfection of the Ponzi scheme! Mr. Madoff would be proud of Mr. Bernanke. He is his best apprentice.

This has two advantages: 1) The Fed has found a way to spread its newly printed Dollars and

2) Now the Fed has the possibility to dump European souvereign debt andy time they want thus they have a direct influence on the price.

And the tricks is I think as follows: The Fed sells the European debt on the secondary market for a deep discount and the European souvereigns buy it there with lets 30% discount. The money needed for this purchases is loaned from the banks. So in the end the European countries in need sell first for full price to the Fed and reduce their debts in reality in the following step by lets say 30%

So at the end the souvereigns do officially not default because the Fed simply pays lets say 30% more as it is worth for the banks.

For the banks is good business too. They earn of course a commission plus they have received the full payment for the old debts which can now be paid because the Fed is buying the new debt at first for the full face value. There is no default at all. Everybody is happy but somehow its stinks to heaven.

You guys know not to click on any links or attachments when you get an email from "google" or others with an "update."

Save them. They have sent the same one to me twice now. I presume to be from government for my inflammatory comments. I presume it is government because my antivirus scanned it and didnt recognize it. That one may be valuable so I gave it to a couple of friends.

If it is not an attachment but a link save it on a junk computer just dont run it.

I used to laugh at you paranoid types. However I suppose these could just be from zombie spammers who hijack the computer to spam others, but all the other ones but this were tecognized by my antivirus programs.

My grandma spent decades researching our family and found out we are related to Robert the Bruce and Elizabeth. Then my dad told me everyone from the Isles is related to Robert the Bruce and Elizabeth.

Don't you realise. The goal of the Fed over 15 years ago was to reduce interest rates, keep inflation within 3 %. All central banks followed the same BIS script.

If the economy suffered from too much debt, and now their solution is even lower interest rates, it does not matter. The end goal was US citizen debt, default and possible bankruptcy.

How can US Citizens flee when they are bankrupt. You can't get a passport.

Chomsky predicted this year ago. A nation of serfs. Cheap labour.

If they print money, the benficiaries will be the ones with access to ZIRP cheap money.

As a recipient of ZIRP money, you can exchange those new crisp bills (Or do a direct credit transfer and save on printing costs) for nice farmland, hookers, and other trinkets, going penny on the dollar.

Haven't we done this already? I thought a lot of the QE2 funds suddenly appeared in European banks in the quarter after it was all said and done? First the Fed buys US treasuries off the Europeans then they buy THEIR treasuries off them? Kind of bass ackwards.

The Fed will most definitely monetize this Euroexcrement, they have no choice but to double down or they're toast, and better yet, this is part of a long term plan to do to the US, what these same Central Banks have done to Chile, Argentina and many other countries throughout history. It's how they take all the valuable bootie for nothing. And it works every time.

I used to laugh at paranoid types too, but now, some of what they have been saying ,unfortunately, has started to sound more and more plausible, certainly, they are making more sense than the explanations that we are hearing from our politicians or the MSM to explain, why on earth, they felt they had to rush the passing of the NDAA, in secret, and without a debate, for example.

After announcements like this, the total media blackout of Ron Paul, the black out of almost everything that should be front page news like the passing of the NDAA for that matter, the conspiracy theorists get more and more credence every day. And then, there are other things that make you go hmmmmm...

For example; the die hard conspiracy theorists believe there are child pornography rings supported by the child protective services, the Vatican, and other 'charities', and that these are used so that pedophile politicians can be given children to abuse and then blackmailed later with this information. They are also convinced that September 11th was an inside job. They claim that there was Chinese Gold being held by the Fed and the Chinese asked for it back in early 2001 with Cantor Fitzgerald acting as their fiduciary and that TPTB planned to steal it to use for the issuing of the new currency after they collapsed the dollar. They have been saying that this plan was going to be put into place after Martial Law was declared, using the Patriot Act that was an exact copy of the Nazi Constitution to detain all dissidents, after starting WWIII by staging a false flag between Iran and Israel as the trigger. They also believe that MF Global was a hit to cover JP Morgan's silver shorts.

This just sounds absolutely insane, I mean you don't want to believe such things are possible.

Then, we hear that former FBI director Louis Freeh, most famously known for botching the September 11th investigation, has been appointed as an MF Global trustee, and, by Penn State to 'investigate' the Sandusky situation, where we all know a DA disappeared after investigating in '05 and rumor has it; kids were being pimped out to wealthy donors and politicians through Sandusky's charity with the full knowledge of Penn State President Graham Spanier. Then, you hear that Graham Spanier was the President of the University of Nebraska during the Boys Town pedophile scandal and while there was a big proponent of writing Anti-Piracy and file sharing legislation with Al Gore.

I hope that it is a coincidence that Freeh is the go to man to investigate all of these things and he's just a good guy who is there to get to the truth.

I just want to go to sleep tonight and wake up in another time when accusations about FEMA camps and government agencies covering up for pedophile rings, sounded absolutely nuts. Maybe I'll wake up tomorrow and it will be 1996 instead of 1984.

I just accept it as fact. It makes me feel better. They can't take away my free mind.

What do we do? Nothing. When is Zero Hedge going to organise a protest. With real goals. Never. Because they make money off the advertisment on the site, and provide infotainment for we the papranoid people.

You know, I think that people feel powerless when faced with a superior enemy or at least one that feels so powerful, but everyone has to remember that most people have a conscience and most people don't want to be manipulated, lied to, or used to cause suffering to others. Sure, there are sociopaths and sadists that feel nothing or enjoy causing pain, but those people are in fact raririties in the general population. Even people within the system feel terrorized and appalled by it, of this I am sure.

Do we really think that all of the journalists that work for the MSM want to be violating everything that they were taught in school about being real journalists? Do we think that all politicians enjoy selling out their constituencies? Do we think Generals don't feel guilt sending their men to die, not to protect the Constitution of the United States or American people from harm, but for the profit of a few?

People lie to themselves and rationalise that the ends justify the means, tell themselves that they have no choice, or that what they're doing is not that bad. That's why it's so important to expose the truth every chance that we get and lend our support to all of the good people that are fighting injustice as we must remember that there are a great many out there fighting it right now.

If people remember the way that bullies terrorized kids at school while others watched, hating it, but staying silent because they didn't want to be next in the firing line, until someone, stood up, and gave others courage to do the same.

I think it is important for all of us to do our part to resist the agenda that is currently in place and for all of us to do something proactive, not just in our thoughts, but externally, every single day, to make progress in the good.

The fact that people are waking up all over the world is the beginning of real change, and I know, that although it will be a tough road ahead, we will be victorious in the end.